The Big Question – Britain and Europe

As the shock and panic subsides in the coming weeks following the UK’s decision to leave the European Union, the negotiations for a new relationship will become the focus for thought, and one core question will dominate.

Britain’s decision to leave the European Union does not mean we will stop having a trade relation with the EU as a whole or its individual members. The EU makes up 44% of UK exports, although it is worth noting that percentage has been falling. And the UK is a significant market for EU goods; the UK is Germany’s third largest market and they have no desire to loose that market.

At present there is a good deal of posturing across all of Europe driven by, genuine shock at the decision, fear in the EU of contagion and a fear of what is an unknown future for all involved. However it is in both the UK and Europe’s best interest to work out a sensible trading relationship.

Around these negations will remain a good deal of emotion and loud discussion of peripheral issues. The UK has chosen to leave the EU club, that is a rejection of what the club stands for, those who remain within the EU will react as any club members do to those who choose to leave, with annoyance and some fear that those leaving might be right.

However practicality will drive some form of trade relationship, and much of the negotiation will be relatively easy. The UK will accept making things to EU standards because we already do, and EU standards are respected across much of the rest of the world. The UK will pay for access to the European Market, as do such outsiders as Norway does, the only question will be how much, the UK government will want to show it is lower than what we pay now for political reasons. The reality is however that Norway who is not part of the EU pays only slightly less per person to the EU than the UK does as a member.

The big question will be the UK’s desire to have access to the European Market, and the EU’s insistence on the free movement of labor from the EU.

The freedom of movement of labor is a major issue for the EU and particularly Germany. It is one of four principles of a fair common market as seen from the EU’s perspective, free movement of goods, services, labor and Investment.

The level of internal movement of labor since the Eastern European Countries joined the EU has been significantly higher than expected; this linked to a general sensitivity to immigration in the UK following decades of immigration from commonwealth countries has made this issue very sensitive in UK politics, and it was a core decision driver for many leave voters.

In the near term it will be politically impossible for any UK PM to accept free movement of labor as a price for access to the Common Market. Equally it will be impossible for the EU, and particularly Germany to offer Common Market Access without free movement of labor.

As the status quo will remain as it is during the two years allowed for negotiations post the UK officially telling the EU it wishes to leave, their will not be significant pressure on either side to accept painful concessions on this key issue.

However when the two-year negotiation ends, unless extended by a unanimous EU vote to extend negotiations, tariffs will reapply and it is this that will focus minds on both sides and possibly bring a workable compromise. It may well be impossible to really tackle this core issue until the reality of tariffs coming back is imminent, as so often the timing of negotiations can be critical.

If a sensible relationship can be forged together with strong exports to other parts of the world, Britain outside the EU can be made to work.

The problem for the UK is that during negotiation period uncertainty will stop at least some investment in the UK. For example both Honda and Nissan build cars in the UK primarily for export to Europe, with uncertainty over whether such exports will be tariff free in the future, any further investment by such companies is likely to go to a country in the European Union, and not a UK pledged to leave the EU.

The UK’s problem is therefore building confidence amongst investors during what will probably be a long period of uncertainty. Let us hope our new PM whoever she may be is up to the challenge.

Testimonials

"I had the honor of working with Mark for 3 years during my tenure at Hcareers. Mark is a truly dedicated and sophisticated executive, bringing the company from an early stage start-up to a leader in the industry in a short period of time, resulting in a very lucrative acquisition. Mark leads by example and his strength, knowledge, and dedication lead his team to growth and incredible success. I would not hesitate to join a company under Mark’s leadership, and would be grateful to have the opportunity to work with him again. September 15, 2009."